Exclusive: Regulators scrutinize financial risk-modeling firms
U.S. government officials recently proposed creating scorecards to measure the potential threat posed by firms that offer risk models, amid concerns that large financial institutions may be too dependent on the same products, according to documents reviewed by Reuters.
The review marks another area of scrutiny for the Financial Stability Oversight Council, a group of regulators that has already imposed tougher rules for companies including insurers, banks and market utilities such as derivatives clearinghouses. The council is also generally responsible for identifying emerging risks to the larger financial system.
In a closed-door meeting on March 25, FSOC staffers delivered a presentation about a niche group of third-party firms that sell asset valuation, investment advice and risk measurements to pension funds, asset managers, insurance agencies and banks, according to the documents.
The documents lay out the government’s concern that financial firms may rely too heavily on the same outside risk models and valuations, and that any flaws in these services could result in a wide misunderstanding of the true risk of firms’ investments and other assets.
A Treasury spokeswoman told Reuters that the proposed scorecard approach is consistent with the council’s mandate to look at issues across the financial system. She added that no decisions have been made on the approach, that it is not designed for any particular company or industry, and should not be read into.
Among the service providers mentioned were BlackRock Solutions, a unit of giant fund manager BlackRock, Bloomberg LP’s Bloomberg Asset and Investment Manager (AIM), MSCI’s RiskMetrics and BarraOne, Citigroup’s Yield Book, Barclays’ POINT, BNY Mellon’s HedgeMark, FactSet, IBM’s Algorithmics and Charles River’s Charles River Investment Management Solution.
Though the documents viewed by Reuters list 10 examples of third-party service providers that help institutional investors evaluate risk, the presentation highlights one company – BlackRock Solutions. The documents say that BlackRock offers what are known as “end-to-end” services, meaning it helps clients throughout the entire investment process.